Each week, we tap the insight of Sam Stovall, Chief Investment Strategist, CFRA, for his perspective on the current market.
EQ: Aside from a mid-month dip, May was positive for the market, and culminated in the S&P 500 finally overtaking the 2400 level. With the market chugging along the way it is, what’s the likelihood we experience a June swoon?
Stovall: It is sort of funny because there is the saying of a swoon in June. But my analysis shows that despite the rhyme, stocks just end up marking time. On average, the market has gone nowhere in June. Its average price change is flat and has gone up as frequently as it has gone down. The market has gone up 52% of the time historically in June, which is no better than a coin toss.
Its best month ranks second lowest when compared with the best performances of the 11 other months, and its worst performance is tied for third among the shallowest declines. So, you don’t have a lot of excitement to the upside or the downside with June. Not surprisingly, the standard deviation of these returns was actually the second lowest of all 12 months, and its average daily volume was the third lowest. I think a lot of people just tend to go away in June. So, maybe we should come up with an adage to suggest we might as well take the month off.
EQ: Heading into the year, the Energy sector was expected to be a big rebound story for the market. As things currently stand, it seems to be stalling a bit. Is Energy’s stagnation a significant concern for the broader market at this point?
Stovall: Certainly, the growth in earnings is the big story, and that’s emanating from Energy because, for the full year, earnings are expected to be up 300%. But if you’re starting from such a low base, then any change is going to be magnified. I think we ended up surprising a lot of people in 2016 with how quickly Energy bounced back. Now, as investors start to question the ability of OPEC and Russia to stick with their production cuts, I think many of these successful investors are thinking that maybe it’s time to cash in some profits and see what happens next.
In general, there is a lot of interest in what’s going on in Energy because many times it can be predictive of the global economy. But the sector represents less than 7% of the S&P 500, so whatever happens to Energy doesn’t necessarily have a big impact price-wise on the overall S&P 500, just possibly on the general confidence of investors.
EQ: When you look at investors potentially taking profits, other areas like Financials and Industrials are seeing softness as well. These areas all saw a big boost post-election. Could this be signal a potential reversal of the Trump trade or is it still too soon to say?
Stovall: I think that we are going through a metamorphosis from the Trump hype to Congressional gripe in that what President-Elect Trump had said really stoked investors’ interest. We then had a skyrocketing stock market, interest rates go up, and the value of the dollar soar. Obviously, many of these parabolic moves were just too hard to sustain.
However, I think that while Financials, Industrials, and in general, the Trump Trade, is on life support right now, you can’t really start reading it its last rites. Maybe we don’t have tax reform; maybe we simply have a tax cut, but that tax cut could be helpful to corporate profits, probably not this year but maybe next year. Also, we could end up seeing some sort of a one-time break for repatriation of foreign earnings, and then perhaps, something that would be near and dear to all representatives’ hearts would be infrastructure spending. We’re not going to be getting a lot of that before the August recess, but I think investors are holding out hope that there will be getting something to cheer about in the second half.
EQ: The Fed is largely expected to raise rates again in June. With the market essentially treating this as a foregone conclusion, what else should investors be watching for out of the Fed?
Stovall: Well, I think they listen to what the Fed is talking about and try to gauge whether we are likely to see if the Fed raises rates in June. But take a look at sector performances. You’ll find that Utilities, which have a 3.5% dividend yield, as well as Consumer Staples, which has about a 3% dividend yield, and real estate are starting to pick up the pace. So, I really wouldn’t say that a rate increase is a foregone conclusion.
With the Chicago PMI data, existing home sales and other data points coming out weaker than expected, the Fed might be scratching its head and saying to itself that maybe they should wait until the next meeting before they raise rates again because they still have six months to go in which to raise rates one, two or three more times. I think the Fed is keeping its finger on the pulse on economic growth and inflation, and right now, it’s not liking what it’s seeing.
EQ: With expectations of a June rate hike at almost 90% at this point, if we do get a surprise in which the Fed doesn’t raise rates, how do you think that could affect the markets?
Stovall: It all depends on the reasoning behind it. If the Fed hints that they’re worried about an economic slowdown, then that would not be a good thing. Most investors believe that the economy is going to be picking up the pace. The Atlanta Fed’s GDPNow forecast was recently elevated from 3.7% to 4.1% for the second quarter, but if all that is not likely to come to fruition, then yes, I think investors would be a bit concerned and would be worrying that maybe a recession is closer at hand than had been earlier anticipated.
